— During the entire panic on the downside you had to ask ‘are things really that bad out there?’
— One also has to ask how does a cut of 50 basis points on the Fed funds rate positively impact the trajectory the COVID19 epidemic.
— Fortunately, the answer may be ‘no’ to bullet number one and as to number two, it is tough to answer in the affirmative, even to the idea that somehow it will shore up the economy
A real black swan event — a crisis of confidence
Over the past 3 years the market has forgotten about the idea of a real crisis facing the Trump administration as most of the so-called crisis we’ve faced have been of the administration’s, especially the president’s own making … the escalation and deescalation of the trade war, the war of tweets between the White House and “Little Rocket Man” and the escalation of our hostilities with the government of Iran. Any one of these he could dial up or dial down by tweet.
Coronavirus2019 is a germ of a different color. He cannot manipulate the facts on this potential pandemic. He may muzzle the federal staff working on the problem (this does not help) but he cannot muzzle the media which is always on the lookout for a bad news story.
What difference does 50 basis points make?
Except to scare people, making them believe the worst is yet to come, it will do absolutely zero to change the course of the virus. As witness to this the United States Treasury 10-year note has traded below a 1% yield for the first time in history as investors flew (after the rate cut) to the safety of its 1% guaranteed return. Warren Buffett has pointed out in earlier comments that in the case of someone buying a 10-year with a 1% coupon, it is like buying a stock at 100 times earnings with a guarantee of no growth for ten years. Before the rate cut announcement the 10-year had traded up to about a 1.17% yield earlier this morning. This move points to a total lack of understanding of how it would affect the markets and a tendency on the part of the White House not to listen to knowledgeable advice. Meanwhile the president, after the cut, continued to clamor for even more rate cuts.
Finally, a fifty basis point rate cut was wasted on a problem it could not improve, leaving less in the Fed’s tool kit if a real problem, a problem it could help remediate, arose.
A CRISIS OF CONFIDENCE
Before I begin this final selection of the post, I would like to request that those of you who want to make my remarks into a political food fight, please take it somewhere else. These are my opinions about the reactions of the market. They are neither Republican or Democrat. I may be off base entirely but what I am writing is consistent with observations I’ve made over time.
When Donald Trump won election in 2016, my knee-jerk reaction was that the market would get hit hard but eventually recover. My reasoning was that he was unpredictable and inexperienced and that this would bring uncertainty which the market would hate. I immediately realized that I was wrong. The market mainly cared about a tax cut and de-regulation. The president would surround himself with good people who would steer him in the right direction on issues.
Well, the steersmen all left or got fired. He has surrounded himself with people, not necessarily experts in their field, who would rather go along to get along than provide advice contrary to the president’s belief or opinion.
Today’s rate cut was a perfect example. Chairman Powell and the Fed have been badgered for weeks to cut rates in response to COVID19. Why? Because the president believed that it would set a fire under the market, which appears to be the key metric by which he benchmarks his presidency and re-electibilty. Instead, the rate cut damaged the image of the Fed as an independent non-political agent and, I believe, doused yesterday’s formidable rally.
This is the downside of the easy tax cuts and deregulation.
In Conclusion, what we saw in the market today carries the earmarks of a crisis in confidence even as the coronavirus seems to be loosening its grip in China (BTW this has been a trend over the past week). For a good perspective on the world impact of the virus, worldometer.info is worth looking at. Remember, the world population is 7.4 billion. so far there have been less than 100,000 cases of COVID19 identified.
In the final analysis one other culprit in this panic has been the a media and with the media the bark is always worse than the bite. On the bright side and something we should not forget healthcare advancements plus instantaneous communications should make this potential pandemic much easier to reign in than the Spanish Influenza (maybe a comparable) a century ago. My advice, “Keep calm and carry on.”
What’s your take?
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2 thoughts on “Nothing inspires confidence like an emergency Fed funds rate cut”
This is a great post, Bill, one of your best. You are “right on” that a rate cut does nothing to help us with the Covid-19, but it empties the toolkit for when a rate cut is really needed for a “real” reason. I grieve for the former independence of the Federal Reserve. That independence used to be one of our country’s great strengths. Now, apparently, no more.
Don, thank you very much for your kind words. I think we are going through a really embarrassing Period in the history of the United States. I think we’ve had them before. I blame globalization for much of the pain and displacement many have endured. To me it very much smacks of the dislocation caused by the industrial revolution. I pray that we come out the other side a better country. As a perpetual optimist, I think we will.
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